Energy Efficiency Mortgages (EEM) enable homeowners to add energy efficiency to their mortgage at time of sale, taking advantage of long-term and very low rate financing. To qualify a purchaser must undertake an HERS rating to assess the work scope and calculate payback.

It seems like a no-brainer. Target homeowners during a transaction and during a period in which they traditionally spend substantially more on home improvements. One NAHB Study showed that a buyer of an existing single-family detached home tends to spend about $4,000 more than a similar non-moving home owner, including $3,600 during the first year.

While focusing on a home purchase a trigger for an energy efficiency upgrade seems extremely logical, it has not been working in the market. This “trigger point” continues to be the focus of government programs, whitepapers, and both State and National legislation, yet EEMs have not achieved more than a toe hold in the market, and the numbers continue to fall.

Total US Energy Efficiency Mortgage (EEM) Loans Per Year

So the question is, why is something that makes so much sense on paper failing to such a degree in the marketplace?

1) People buy solutions to problems

Unlike kitchen, bathroom remodels, and new flooring, energy efficiency and comfort are not visible to a homeowner that has not yet paid a bill or spent a cold winter (or hot summer) in their new home. As the trigger to get people to invest in energy efficiency and comfort solutions for their home tends to be based on solving a pain point, it is hard to motivate a new buyer to take action on issues where they have yet to experience the problems.

2) Buying a house is stressful enough

The process of buying a house is full of stressful decisions, complexity, and risk - and for most people constitute their biggest single investment. Adding another moving part to this process, one that will require more inspections and general make transactions take longer is just not a priority for most home buyers.

3) There's no money in EEMs

Nationally, Energy Efficiency Mortgages add and average of only $7,500 for energy efficiency upgrades onto the base mortgage (based on data from HUD). When you consider that time is money, and that the brokers and realtors who are shepherding the transaction through the process get paid when it is completed, there is no wonder we don’t see realtors jumping up and down excited to promote EEMs.

On the typical EEM, realtors make no money, as their commission is based on the sale price, not the added value of the EEM. Realtors make no more money on an EEM than a traditional mortgage yet they incur risk, extra time, and expense.

So funny that people think it's OK to expect OTHER people to bear the burden of loss generators with no upside potential.

This idea of placing cost on others "for public good" always seems brilliant to these these brainless greenwash hypocrites, but when it comes to their own money they don't want it wasted.

People taking too little time to think about problems seem to come up with such simplistic stupid ideas for solving them. Not a lot of extra work, for each participant simply ask "How would I feel if it were me assuming this risk/reward scenario?"

If the juice ain't worth the squeeze for any of the drivers, it's a stupid plan.

Very good post. I think the prospect of Residential PACE programs make much more sense than EE mortgages. It is a shame that the Administration hasn't put more pressure on the FHFA to reverse their decision.

Jeremy Hutman

3/3/2014 08:15:16 am

I think you are right about PACE. FHFA may even play ball with California on their proposed loss reserve. I don’t think the administration could have done too much more than they did. Congress however...

Assuming that the new owner put at least 10% down PACE is a viable option. EEMs and 203ks are way too complicated and I have yet to meet a contractor or lender who is happy with the process.
The three most important characteristics of a successful residential energy loan program are simplicity, simplicity and simplicity (loan terms are a close fourth). Assuming the programs meet these criteria evidence suggests contractors will get on board and market PACE. Real estate agents who are seeking to differentiate themselves will also market PACE (after closing).

Philippe Dunsky

2/27/2014 04:11:57 am

Great post. Just as critical to be reminded of what doesn't work as what does. My guess: EEMs aren't adopted because they're not marketed, and they're not marketed, as you say, because most realtors don't have an interest in talking them up to buyers. On the other hand, you'd think that FIs would take that part on...

Trish

2/27/2014 06:05:36 am

Matt - you've nailed some important issues with the EEM. You may wish to explore the 203(k) market. It appears to be the happening spot for EE upgrades.

Debra Little

3/8/2014 11:08:01 am

EEMs are a no-brainer for those with both practice & process. Experience of those who have both are the bright lights of success in EEMs. One lender I know has been actively guiding home buyers to the EEM win/win for over 25 years. He has developed a smooth process that makes it hassle free for the RE agents and the consumers. The process is important. The perception by both lenders and agents that EEMs pose risk in delay of a close or are fraught with hassle factor is what holds more back from gaining the experience and developing a smooth, consumer friendly process. The unknown & untried. This lender is often the first to mention the opportunity of E upgrades to the consumers - not their agent or a HP contractor. He has stated that in 25 yrs for those that he's introduced the EEM & who have qualified, not one has turned it down. As Matt said it's a no-brainer, all positive. The best borrowing rates happen her w/ 30 yr mortg. Most folks are already planning on investing a bit in at least minimal if not significant improvements. An EEM is limited to 5% of purchase price (tho also available as refi) and can be combined w/ 203ks & other loan types plus incentive programs such as Energy Upgrade CA and more to realize a combination of some of the best financing available. What the agents don't realize (because less than 1% have yet to gain 'green home' training), the WIFT, is that their clients experience of living in a high performing home will result in the best referrals ever. They want sale & referrals. EEMs open doors to more sales & the following testimony & referrals like no other.